Palo Alto Continues to Make Progress With New Strategy. Is Now the Time to Buy the Stock?

Palo Alto Networks' (NASDAQ: PANW) 2025 has started out better than its 2024, when the stock plunged following its fiscal second-quarter 2024 results. A year ago, the company commenced its new "platformization" strategy to move customers to one of its three cybersecurity platforms and away from point solutions.

At the time, the company said its customers were experiencing "spending fatigue" as they weren't seeing enough incremental benefits from adding new point solutions from disparate vendors. To counteract this, the company set out to have its customers standardize on one of its platforms. However, to convince customers with multiple single-problem solutions from various vendors with different contract lengths to do this, Palo Alto agreed to give customers solutions for free. This meant that clients didn't have to pay for the same solution from two different vendors at once.

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While this was a bold move, it would also negatively affect Palo Alto's billings and revenue growth over the next 12 to 18 months. The company said that the program would be the equivalent of giving free product capabilities away to customers for six months.

Let's look at Palo Alto's fiscal Q2 2025 results a year after the introduction of its platformization strategy, and see how the company is progressing.

Platformization progress continues

Palo Alto's platformization strategy continues to progress, with the company adding 75 new customers using one of its security platforms in the quarter. It ended the quarter with 1,150 platformizations within its top 5,000 customers. Most of these are on its network security platform, but the number of customers on two of its platforms was up 50%, and the number of customers on all three of its platforms tripled. It's looking to have between 2,500 to 3,500 platformization customers by fiscal year 2030.

Overall, Palo Alto's fiscal Q2 revenue rose 14% year over year to $2.26 billion, which was just above the company's forecast for revenue of between $2.22 billion and $2.25 billion. Service revenue climbed 16%, with subscription revenue jumping 20% and support revenue increasing 8%. Product revenue grew 4%.

Next-generation security once again helped drive growth. Next-generation security annual recurring revenue (ARR) soared 37% to $4.78 billion, driven by its advanced subscriptions, SASE (secure access service edge), and Cortex (managed detect and response) solutions.

Image source: Getty Images.

Remaining performance obligations (RPO), which is the revenue a company expects to generate from existing contracts, grew 21% to $13 billion, matching the high end of its prior forecast. Current RPO climbed 17% to $6.1 billion.

Adjusted earnings per share (EPS) rose 11% to $0.81, which was ahead of its $0.77 to $0.78 guidance after taking into account its stock split.

Looking forward, Palo Alto forecast fiscal third-quarter revenue to rise by 14% to 15%, to between $2.26 billion to $2.29 billion. It's looking for next-generation security ARR of between $5.03 billion to $5.08 billion, representing year-over-year growth of between 33% and 34%. It's expecting RPO growth of 19% to 20%, to $13.5 billion to $13.6 billion. Meanwhile, it forecast adjusted EPS of between $0.76 to $0.77.

For the full year, the company bumped up its revenue and adjusted EPS guidance once again. It's now expecting revenue of $9.14 billion to $9.19 billion and adjusted EPS of $3.18 to $3.24.

Below is a table of the company's guidance revisions.

Data source: Palo Alto Networks.

Is now a good time to buy Palo Alto stock?

Palo Alto continues to do a nice job with its platformization strategy, getting customers to standardize on its platforms. While it has affected growth in the short term, over the long term, it is the right move. Meanwhile, the company is looking for revenue growth to start to accelerate next quarter.

The company's new solutions appear to be resonating with customers, as evidenced by the big jump in next-generation security ARR. It's seeing nice momentum with solutions such as Cortex and cloud security solution Prisma Cloud, whose additions are driving larger deals. Meanwhile, the company is integrating artificial intelligence (AI) into its security solutions and using AI to improve operational efficiencies, such as using an AI copilot to help with global customer support.

From a valuation standpoint, Palo Alto stock trades at a forward price-to-sales ratio (P/S) of 12.5 times fiscal 2025 estimates for a company projecting to grow revenue in the mid-teens. That's a discount to rival CrowdStrike and premium to SentinelOne, with both competitors currently growing more quickly.

CRWD PS Ratio (Forward 1y) data by YCharts.

Palo Alto stock has bounced back following the plunge it saw last year, ahead of any actual rebound in its business. While I think the stock looks a little pricey based on its current revenue growth, I think there is a path to return to around 20% revenue growth, since that is where its RPO growth currently sits. That would likely lead to upside from current levels.

Overall, I think the stock should do well over the long term.

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Geoffrey Seiler has positions in SentinelOne. The Motley Fool has positions in and recommends CrowdStrike. The Motley Fool recommends Palo Alto Networks. The Motley Fool has a disclosure policy.